Scan-Based Trading Still A Work In Progress

Scan-based trading (SBT) is not so much about coordinating data as it is about shifting financial risk from seller to supplier.

It's electronic commerce come to the checkout counter. Yet if there's any form of conducting business electronically that can change the relationship between retailers and their suppliers, it's trading goods based on the bar codes being scanned at cash registers.

Scan-based trading (SBT) is not so much about coordinating data as it is about shifting financial risk from seller to supplier. Not only must a vendor such as American Greetings pay for the inventory of cards that will sit on the retailers' shelves right up until the moment of salesuch vendors also must bear the burden of making sure there are no holes in the tracking of products and transactions.

Otherwise, they might never get paid.

Scan-based trading "is frightening" says Larry Scheur, president and CEO of Empire State News, a Buffalo, N.Y.-based magazine and paperback book wholesaler. Scheur sees the technology as being driven entirely by the bottom line of the retail industry rather than mutual benefit.

The negative effects of initial scan-based training systems were made painfully evident last year. American Greetings, the nation's second largest card supplier, reported that the scan-based trading initiative it launched in the November 2002 quarter with Target and Wal-Mart meant it would have to reduce sales by $65.5 million. That was due to the fact it had to take back into its own inventory the value of cards already booked as sold to retailers.

The idea behind these systems is simple enough. Rather than paying for products from suppliers as they are brought into the store, the supplier retains "ownership" of products on the shelf. Sales information is sent automatically from retailer to supplier. When the supplier receives that information, an invoice for goods sold is automatically created and an order is submitted to replace the sold merchandise.

In theory, everybody is supposed to come out a winner. The retailer loses the financial risk of carrying inventory while reducing its administrative and order management costs. The supplier gets daily alerts to replenish its wareswhich means more salesand is able to gather nearly real-time data about the performance of products store by store. This data can be used by the supplier to improve forecasting, production planning and product targeting.

In a pilot conducted in 2000, commissioned by the Grocery Manufacturers Association (GMA), viaLink, a systems integrator, acted as the intermediary between two grocery chainsSchnuck Markets in St. Louis, Mo., and Andronico's Market of Berkeley, Calif.and 12 suppliers.

The benefits of the pilot were measurablesales went up 3% to 4% for the retailers and between 2.5% and 5.2% for suppliers because stocking levels were better maintained. The number of invoice deductions and price discrepancies caused by mismatches in product data was decreased by 70%.

But that was a test.

In the real world, the success of these systems depends on many thingsthe accuracy of the data coming from retailers, the readability of bar codes and the synchronization of databases, among others.

One concern many suppliers have relates to a retail phenomenon known as "shrink" products leaving the store by unaccounted means, from employee theft to a mistake in recording a sale. Shrink is usually assumed to be 1.5 % of sales, according to Betsy Hill, viaLink's marketing director.

In a traditional supply chain, retailers are stuck with the cost of "shrink." But in scan-based trading, the supplier is forced to assume those costssince goods don't get invoiced until they are sold, items that fly under the radar of the retailer's point-of-sale reports never get invoiced.

In the GMA 2000 pilot study, "shrink" was measured at 0.3% But at least one supplier reports bigger problems.

"We were doing an SBT test with a single store," says Empire State News' Scheur about a trial his company conducted. "We went into the store, and bought magazines; we had the magazines, and the register tapes. But the sales never showed up on the SBT report." The retailer got paid, but because of bad data synchronization within the store's own systems, the supplier never did.

Then there's the value of the retail data. Theoretically, suppliers can use the point-of-sale data to better manage replenishment of goods in stores, and forecast demand down the road. But the theory breaks down when it's applied to products that don't fit the grocery products moldproducts like magazines, paperbacks, and greeting cards.

For instance, there's a limit to how much information retailers can get from a bar code. The Universal Product Code that is embodied by the bars is just 11 digits long. That's only enough to identify a manufacturer and product code. Only if the codes are extended to 28 digits (see "Gotcha!") will a supplier like American Greetings get enough information to know exactly which one of its 20,000 new greeting cards each year is selling.

In effect, suppliers like American Greetings only know from the scanner data that one of their products was sold, not which one. That data still needs to be manually collected by American Greetings' merchandisers. So American Greetings can't start the process to replenish cards where they're selling based on scanned datathey still have to incur the cost of manually checking stock on their displays regularly to track the performance of each design.

Unfortunately, many suppliers aren't in a position to push back on scan-based trading, as retailers like Wal-Mart use their buying power to set what type of trading system they're going to use with their suppliers.

For its part, American Greeting is trying to remain positive. "While the charge associated with the conversion will have a one-time negative impact on profitability," said American Greetings in its financial statements, "the Corporation is optimistic that scan-based trading will ultimately reduce costs, result in a reduction in working capital, maximize retail productivity and throughput, and continue to enhance retailer relationships."

Sean Gallagher is editor of Ziff Davis Internet's enterprise verticals group. Previously, Gallagher was technology editor for Baseline, before joining Ziff Davis, he was editorial director of Fawcette Technical Publications' enterprise developer publications group, and the Labs managing editor of CMP's InformationWeek. A former naval officer and former systems integrator, Gallagher lives and works in Baltimore, Maryland.

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